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Beyond the market versus

planning dichotomy:

Understanding privatisation andits reverse in US citiesAmir Hefetz

a& Mildred Warner

b

aTechnion Institute, Haifa, Israel

bCornell University, Ithaca, NY, USA

Available online: 17 Jul 2007

To cite this article: Amir Hefetz & Mildred Warner (2007): Beyond the market versus

planning dichotomy: Understanding privatisation and its reverse in US cities, Local

Government Studies, 33:4, 555-572

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Beyond the Market versus PlanningDichotomy: UnderstandingPrivatisation and its Reversein US Cities

AMIR HEFETZ* & MILDRED WARNER***Technion Institute, Haifa, Israel

**Cornell University, Ithaca, NY, USA

ABSTRACT City service delivery requires planners and city managers to move beyondthe publicprivate dichotomy and explore the benefits of interaction between marketsand planning. Using International City County Management survey data on US local

governments from 1992, 1997 and 2002, we find a shift where reverse contracting (re-

internalisation) now exceeds the level of new contracting out (privatisation). We modelhow a theoretical shift from new public management to new public service in publicadministration mirrors a behavioural shift among city managers. Results confirm theneed to balance economic concerns with political engagement of citizens and lendempirical support to a theory of social choice that links communicative planning withmarket management.

Dynamic Public Service Delivery Reflects New Public Administration

and Planning Approaches

There have been several waves of reforms in public administration and

public service delivery. Since the early 1980s the new public management

wave has captured the attention of city managers and public administration

theorists (Hood, 1991; Kettl, 1997; Osborne & Gaebler, 1992). New public

management argues that local government can become more efficient as a

consequence of both market competition and adopting business-style

management (Dunleavy & Hood, 1994; Megginson & Netter, 2001; Osborne

& Plastrick, 1997). However, empirical evidence does not always support the

superior efficiency of market delivery (Bel & Warner, 2008; Boyne, 1998a;

Hodge, 2000), and city managers exhibit a more pragmatic and dynamic use

Correspondence Address: Amir Hefetz, Department of Town and Regional Planning, Technion

Institute, Haifa, Israel. Email: [email protected]

Local Government Studies,

Vol. 33, No. 4, 555 572, August 2007

ISSN 0300-3930 Print/1743-9388 Online 2007 Taylor & Francis

DOI: 10.1080/03003930701417585



4/20

of markets by contracting out some services and bringing other previously

privatised services back in house through reverse contracting or re-

internalisation (Entwistle, 2005; Hefetz & Warner, 2004; Sclar, 2000;

Warner & Hebdon, 2001).New public management reform stresses that markets could be superior,

whereas current trends in public administration and planning urge the

public sector to interact not only with markets, but also with communities

to encourage democratic deliberation and enhance local quality of life

(Denhardt & Denhardt, 2000; Frug, 1998; Nalbandian, 1999, 2005). This

alternative reform has been coined the new public service in public

administration (Denhardt & Denhardt, 2003) and communicative planning

in the planning field (Healey, 1993). The result is a dynamic decision making

process which integrates market mechanisms with citizen deliberation andvoice (Allmendinger et al., 2003; McGuirk, 2001; Rashman & Randor,

2005).

The new public management has achieved broad acceptance, both in

theory and practice, across the world (Kettl, 1997). The new public service,

which shifts emphasis toward public values and service quality (deLeon &

Denhardt, 2000), is gaining interest among deliberative democracy theorists,

but has not yet effectively challenged the hegemony of market based

approaches to public service delivery. Communicative planning, by contrast,

has obtained wide acceptance across the field of planning (Fischer &Forester, 1993; Healey, 1997). This has led some planners to articulate a

theory of social choice which moves beyond the either/or dichotomy of

markets or planning and argues for a balanced position where both

markets and citizen deliberation can lead towards near-optimal solutions

(McGuirk, 2001; Sager, 2001). By bringing together theoretical streams in

both public administration and planning, we outline an ideological shift in

theory. Using local government service delivery data from municipalities

across the US for the last decade, we are also able to demonstrate a shift in

practice.

Most research has followed the privatisation decisions of local govern-

ments (Boyne, 1998b; Hirsch, 1995; Savas, 2000), but relatively little

attention has been given to reverse privatisation, with the exception of

Warner and Hebdon (2001) in New York State, and Hefetz and Warner

(2004) who studied this phenomenon across US municipalities from 1992 to

1997 using International City/County Management Association (ICMA)

data. No national survey directly measures reverse contracting. To do so, we

paired ICMA survey responses over time. We found, surprisingly, that the

level of reverse contracting was two-thirds the level of new contracting. In

this paper, we follow this methodology and look at the most recent dataavailable for the period 19972002. In the earlier period, 199297,

new contracting out was 50 per cent larger than the level of reverse

contracting (18 per cent against 11 per cent). In the most recent period,

19972002, the proportions flip and reverse contracting is preferred (at 18

556 A. Hefetz & M. Warner



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per cent of all service delivery) over new contracting out (which falls to 12

per cent). We find that stable public delivery over the two paired time

periods, 199297 and 19972002, remains the most common form of service

delivery at 44 per cent, and stable contracting, at roughly 27 per cent of allservice delivery, is also unchanged. What is interesting is the dynamic

behaviour at the margin (Figure 1).

To understand the dynamics of this shift, we build models for new

contracting out and reverse contracting for each of the two paired time

periods. Our explanatory variables provide empirical proxies for various

conceptual concerns of new public management, new public service and

communicative planning. We find the theoretical shift from new public

management toward new public service and communicative planning

mirrors a shift in practice. However, our empirical analysis providesevidence of a managerial and political learning process over the decade that

moves beyond the market versus planning dichotomy of the theoretical

debate and embraces the more comprehensive approach of social choice that

balances attention to both market management and citizen voice.

Shifts in Public Service Management A Theoretical Framework

In this section we outline the shift in theory. Frustration with market failure

arguments and the promise of market approaches offered by public choicetheory (Savas, 1987) led to the new public management and its enthusiasm

for market competition and a customer focus in public service delivery

(Osborne & Gaebler, 1992). As experience with new public management

grew, however, frustration emerged on two fronts. First, recognition of

the challenges of contract management led to new research on service

Figure 1. Dynamics of local government service delivery, 19922002. Source: International City/County Management Association, Profile of Alternative Service Delivery Approaches, SurveyData 1992, 1997, 2002 Washington DC. Analysis by author.

Privatisation and its Reverse in US Cities 557



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characteristics and greater attention to the importance of insights from

transaction costs economics (Stein, 1990). Second, concern over the loss to

citizenship in the consumer focus of new public management led to the

elaboration of public deliberation in the new public service (Denhardt &Denhardt, 2003). Likewise, planning shifted from a technocratic manage-

ment focus to give greater attention to deliberative democracy in decision

making (Forester, 1999). The last decades of the twentieth century were

characterised by a debate among academics over the relative importance

of market and deliberative approaches (Savas, 1987; Sclar, 2000). But

social choice theory moves us beyond this dichotomy toward a balanced

position that recognises benefits from both markets and citizen engage-

ment (Sager, 2002). We argue that the shift in local government practice

toward more reverse contracting is, in fact, a rebalancing that reflectsthe emergence of a social choice position which values both markets and

citizen voice.

Market Failure and Market Possibilities

When markets fail to meet optimal economic welfare, government inter-

vention is necessary to provide goods and services. Reasons for markets

not to function optimally relate to monopoly, information asymmetry,

lower supply level, and myopic use of economic resources by self-interestedcitizens taking a short-term view (Alexander, 2001; Bozeman, 2002; Lowery,

1998).

Market theories and market failure theories are based on the economic

rationale believed to motivate individuals. This rationale is challenged by

new planning theories that presume a broader set of motivations influences

individual and group behaviour (Allmendinger, 2002). In dense and con-

gested metropolitan regions a simple private market is not enough (Hirsch,

1995). The larger and more variable the community is, the more important

the role local governments have in providing these market-failed goods and

services (transportation, recreation, health, etc.) (Frug, 1999). In rural

peripheral regions, at the other end of the scale, markets for public goods

are limited so the market mechanism is less reliable (e.g. government may be

the only available provider) (Kodrzycki, 1994; Warner, 2006; Warner &

Hefetz, 2003).

However, concern with overproduction of market-failed public services

by government led to the notion of public choice theory which argued that a

competitive mechanism for public services could exist at least at the local

level (Tiebout, 1956). This provided the foundation for further elaboration

of market based competitive service delivery through the new publicmanagement (Osborne & Gaebler, 1992) and led to increased support for

the notion of privatisation (Savas, 1987). But markets for public services

were found to be at best quasi-markets with limited competition and serious

principal agent problems (Lowery, 1998).




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Practical experience suggests that markets still are not adequately

recognised for the many spontaneous ways in which they may organise

urban life. Although cities face the challenge of congestion that creates

public goods problems, they also enjoy the potential of market solutionsbased on agglomeration economies and voluntary bargaining (Webster &

Lai, 2003). Thus, for example, both private shuttle buses and public transit

exist side by side in most cities.

Transaction Cost Theory

Transaction cost economics acknowledges the governance structure of

markets and the need to frame the make or buy (contracting) decision

in the context of market structure and principal agent problems. Toevaluate the advantages and disadvantages of out-sourcing public services

(Williamson, 1999), one must look at both the nature of the government

organisation and the nature of the market (Williamson, 1987). As public

administration scholars recognised the importance of transaction costs, they

tended to divide this concept into two factions: the bureaucratic view and the

market view which represent alternative emphases in calculating transaction

costs. The bureaucratic view downplays problems with high transaction costs

in the market and highlights the disadvantages of bureaucracy (Eggers &

OLeary, 1995; Osborne & Plastrick, 1997; Savas, 2000). In this case, trans-action costs of government bureaucracy are assumed to be greater than

transaction costs in the market. The core ideology of this view is that markets

may work with the support of the right public regulatory framework, but

with a limited direct delivery role for governments.

In contrast to the bureaucratic view of transaction costs, the market view

argues transaction costs in public service markets are high due to complex

contract specification and performance monitoring (Brown & Potoski, 2003;

Kavanagh & Parker, 1999; Lowery, 1998; Sclar, 2000). This view of trans-

action costs builds on the rationale to deliver services within the public

sector, unless transaction costs of outsourcing are lower than internal costs

of in-house production (Nelson, 1997; Pitelis, 1991). Under this view, the

nature of a specific service becomes very important, and the monitoring

process is a key to success or failure of the outsourcing decision. For this

reason, easily specified services like refuse collection are considered better

candidates for contracting out than complex social services. However,

empirical evidence on services such as water distribution and waste collec-

tion has not shown consistent cost savings under privatisation (Bel &

Warner, 2007; Domberger & Jensen, 1997). This failure is not simply due

to transaction costs; it has to do with the industrial organisation of themarket itself (Warner & Bel, 2006). Similarly, research on reverse con-

tracting finds lack of cost savings, difficulties in contract specification and

monitoring and problems with market concentration (Warner & Hefetz,

2004).




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From Public Choice to Social Choice

Public choice theory focuses on the political motivations behind managerial

decisions in the public sector and their source of influence (e.g. the effect ofpowerful groups on government regulation and subsidies) (Tullock, 1997).

Public mangers, within the framework of public choice, are credited as self-

interested agents who try to maximise their political utility through longer

terms or larger budgets (Niskanen, 1971). The limit to public choice is that

democratic choice and rational political systems cannot meet optimal social

solutions simultaneously.

Contemporary planning theory emphasises communicative rationality

(Fischer & Forester, 1993). Social behaviour reflects social values, not

just self-interest. Lowery (2000) points out that public choice does not allowfor interdependence and communication to affect individual preferences.

Through deliberation it is possible to express collective desires (Healey,

1996). Frug (1999) argues that community building is the ultimate public

good which reflects the option to stay and exercise voice over services.

Social choice theory takes this one step further and notes that through

incremental dialogue, in an iterative process that combines both markets and

planning, more socially optimal solutions can be reached. The social choice

approach recognises the importance of both transaction cost theory and

social communicative theory (Sager, 1998). The major assumption of socialchoice theory is that deliberation matters. More heterogeneous places, in

which conflicting interests are present, face a higher level of constraints to

specify services and a greater need for a public deliberative process. Local

governments are public organisations that recognise the potential of market

solutions and the need for debate to respond to diversity and resolve conflicts.

For example, our analysis of the ICMA data shows that many US local

governments contracted out recreation services in search of efficiency gains.

But citizen concerns over access and control have fuelled a large reverse

contracting process. These re-internalised services now benefit from more

efficient market-style management (e.g. user fees) but also have built in more

robust and explicit mechanisms to ensure community voice and control

(neighbourhood or parent oversight committees) so that a social optimum,

beyond mere economic efficiency, is reached.

A key role of local government is to create the framework for a

deliberative process whereby citizens develop the political capacity to engage

their differences and identify solutions that do not divide the community

(Nalbandian, 2005). A social choice approach can use a combination of

market incentives and public deliberation to reach a solution that is socially

optimal. Planning critics have argued that markets would yield moreinclusionary zoning than planning when the public review process is

captured by special interests (Staley & Scarlett, 1997). But the market

typically undersupplies public amenities parks, open space and affordable

housing. Several cities have combined the deliberative mechanisms of




9/20

land use planning and zoning with market based development rights trad-

ing schemes to promote land use and housing development that is more

environmentally sustainable and socially equitable (Johnston & Madison,

1997).The dichotomy between markets and planning is fading as transaction

costs are used to help explain the relationships between government and

market (Nelson, 1997; Williamson, 1999), and social choice brings in a

dynamic view over space and time that shows how markets and planning

can work together through deliberation (Sager, 2001). A social choice

framework acknowledges that a mixed market and planning environment

better fits the needs of complex cities.

Figure 2 shows how managers in a social choice framework balance the

benefits of competition (as argued by new public management), with theneed to structure markets (as argued by transaction cost economics) and to

ensure citizen voice (as argued by new public service and communicative

planning). We hypothesise that the shift in preference for new contracting

out to reverse contracting over the decade 19922002 reflects a managerial

learning process that recognises the limits of market competition, the need

to manage markets and ensure public voice. We expect the importance of

transactions costs and citizen voice will increase over the decade. These

theoretical components support a theory of social choice and help explain

the shift back towards public delivery as a rebalancing of service delivery tobenefit from markets as well as citizen deliberation.

Data and Methods Longitudinal Outlook

To measure structural shifts we combine the ICMA surveys from 1992, 1997

and 2002 and look at patterns of service delivery over time. The ICMA data

cover 64 public services in seven broad areas: public works, public safety,

public utilities, human services, parks and recreation, culture and arts and

support functions. The main alternatives to direct government delivery are

contracts to private for-profit firms and intergovernmental contracting. The

Figure 2. A framework for understanding local government service delivery.




10/20

surveys also ask managers about factors that are motivators or obstacles to

alternative service delivery.

The ICMA sample frame includes all counties with more than 25,000

population (roughly 1,600) and cities over 10,000 population (roughly3,300). Roughly a third of all governments contacted responded (31 per cent

for 1992 and 32 per cent for 1997, 24 per cent for 2002) but only about 40

per cent of respondents are the same in any two paired surveys. To track

changes over time, we paired the surveys into two sets: 628 governments

responded to the first two surveys (1992 and 1997), and 460 responded to the

latest two (1997 and 2002).

The ICMA surveys ask only how the service is provided currently, not

whether this is a new contract or longstanding procedure. To determine the

level of new contracting out and the level of reverse contracting we needed amethod to track changes in forms of service delivery for every service for

each government. We coded the data into three exclusive categories. Our

method distinguishes whether a service is provided entirely by government

employees, by mixed public delivery and private contracts, or by contracts

exclusively. We combined these exclusive alternatives over time to create a

transition matrix that allows us to track changes in service delivery choice as

shown in Figure 3. This matrix method enables us to compare stability in

form of service delivery and to assess shifts towards direct public delivery

or towards outsourcing. This technique is explained in more detail in Hefetzand Warners work (2004).

Conceptual Framework and Model Variables

In the first part of the paper we introduced the social choice theoretical

framework, which uses both planning and public administration approaches.

The new public management focuses on managerial capacity, while

Figure 3. Matrix for tracking local government service delivery patterns over time (based onHefetz and Warner 2004).




11/20

transaction costs and market failure emphasise the nature of the service and

the market-place. New public service and communicative planning concen-

trate on political interaction and voice. Social choice brings all these concerns

together into one theoretical framework. We compare changes in servicedelivery patterns using this theoretical framework. Transaction costs are

assessed with measures of service characteristics and principal agent pro-

blems. New public management concerns are addressed with management,

fiscal stress and efficiency variables, and level of prior for-profit privatisation.

Place is used to distinguish potential for market failure. A citizen voice index

is created to test for new public service and communicative planning con-

cerns. Means and standard deviations for all variables are shown in Table 1.

Service Delivery Patterns

Our dependent values are the level of new contracting out and the level of

reverse contracting controlled for service provision level. Between 1992 and

1997 on average 6.3 services were newly contracted out while 3.7 services

were brought back in-house on a base of 34.5 services provided by the

average government. This ratio flipped in the 19972002 period. Only 3.5

services were newly contracted out, while 5.3 were reverse contracted.

Although service shedding resulted in a lower number of publicly provided

services in the 19972002 period (31.3 on average), the level of public

Table 1. Descriptive Statistics for Variables in the Empirical Model

1992 and 1997Paired Surveys

1997 and 2002Paired Surveys

Variable Mean St. Dev. Mean St. Dev.

Number of Newly Contracted Out Services 6.3 6.1 3.5 3.8Number of Reverse Contracted Services 3.7 3.7 5.3 6.0Number of Services Provided Both Time Periods 34.5 8.7 31.3 8.9Percent Prior For-Profit Privatisation 0.17 0.115 0.20 0.161Prior Asset Specificity Score 1.78 0.563 1.51 0.710Current Asset Specificity Score 1.76 0.802 1.68 0.650Prior Measurement Difficulty Score 0.45 0.303 0.60 0.487Current Measurement Difficulty Score 0.52 0.420 0.47 0.382Fiscal Pressure (dummy, 1 yes) 0.59 0.492 0.52 0.500Prior Local Expenditure Per Capita

(dfl 1992 100)1878.7 611.3 828.7 578.4

Independent Rural Places (dummy, 1 rural) 0.24 0.425 0.20 0.402Core Cities (dummy, 1 core) 0.24 0.428 0.28 0.449Current Voice Index (% yes of 10 factors) 0.16 0.184 0.16 0.176Council Manager (dummy, 1manager) 0.72 0.448 0.74 0.440

Prior Mixed Delivery 0.19 0.132 0.20 0.162Current Mixed Delivery 0.19 0.162 0.25 0.176N 628 460

Source: International City/County Management Association, Profile of Alternative ServiceDelivery Approaches, Survey Data 1992, 1997, 2002 Washington DC.1U.S. Census of Government Finance Files 1992, 1997.Author calculations.




12/20

delivery of those services that remained actually increased. We also see a

dramatic increase (from 19 per cent to 25 per cent of all service delivery) in

mixed delivery where public delivery and private contracts are combined for

the same service. This redundancy was labelled benchmarking by Mirandaand Lerner (1995) who studied it in the first ICMA survey in 1982, a

tradition followed by Brown et al. (2007) who focus only on transaction costs.

However, we find mixed delivery is a form of market management used not

only to control transaction costs but also to ensure citizen voice and govern-

ment engagement in service delivery (Warner & Hefetz, 2007). Thus, mixed

delivery is an important part of the dynamic use of markets and planning

by local government. Other independent variables are described below.

Transaction Costs

The literature on transaction costs focuses on the nature of services

themselves. Stein (1990) in his analysis of urban services and use of alter-

native service delivery mechanisms, characterised services by their level of

asset specificity and measurability. Brown and Potoski (2003) characterised

each of the 64 ICMA services by level of asset specificity (low 1, high 5)

and difficulty of measurement (easy 1, hard 5) based on survey rankings

from 35 city managers. We advanced Brown and Potoskis measures with an

industrial organisation framework by controlling them for provision level,and the probability to provide services by either public employees, or con-

tracts with for-profit providers for each municipality.1 Higher asset specificity

in publicly delivered services should reduce the likelihood of new contracting

out. Greater difficulty in measuring for-profit contracts should decrease the

probability of contracting out.

Fiscal Stress and Efficiency

Economists believe that the major motivation for reform is low efficiency

and pressure to reduce expenditures. This belief is essential to new public

management. However, we see a reduction in fiscal stress (as reported by

city managers) over the two time periods. We also control for local

expenditures using US Census of Government finance data on average

expenditure per capita (deflated 1992 100). We see that on average

expenditures dropped from $880 per capita in 1992 to $830 per capita in

1997. We expect fiscal stress and efficiency measures to be significant in the

first period when fiscal stress was higher, and less significant in the later

period when fiscal stress fell and managers began to embrace a broader set

of concerns raised by new public service. The new public management viewsmarket delivery as superior to government and we include prior level of for-

profit privatisation as a measure of the enthusiasm for contracting out.

However, if there are problems with external contracting, we would expect

to see more reverse contracting in the later period.




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Market Failure/Complexity

Market failure is, in part, determined by place structure. Metro core

governments, with a wider range of service responsibilities and moreheterogeneous populations may have more problems with market delivery.

Rural independent places are expected to face less robust or competitive

alternative supplier markets. Thus, both urban and rural places may have

less new contracting and more reverse contracting but for different reasons.

We expect cities to reverse their contracts due to the understanding that

there must be a core public force to increase flexibility and enable

responsiveness to changing circumstances, while rural places may reverse

contracts due to lack of a viable private market for public services.

We use Office of Management and Budget criteria to differentiate corecities from outlying suburbs. Core cities have 40 per cent of their residents

working in the central city of the Metropolitan Statistical Area and

employment residence ratios of at least 0.75. All other metropolitan cities

are classified as outlying suburban. Rural independent municipalities are

determined by the non-metropolitan status of their county (OMB, 2000).

Suburbs are the reference category and are expected to be more favoured

by market approaches (Warner, 2006; Warner & Hefetz, 2002a). New

public service concerns would be evidenced by lower levels of new con-

tracting out in the later period, and higher levels of reverse contracting.New public management would appear as continued preference for new

outsourcing.

Management and Citizen Voice

Council manager forms of government are assumed to benefit from more

professional management. New public management argues for a managerial

learning process that leads toward more private production. New public

service, on the other hand, encourages increased attention to citizen voice.

We construct a voice index derived from managers answers to ten questions

regarding citizen engagement in the process of service delivery based on an

index used by Warner and Hefetz (2002b).2 We expect a shift where voice

becomes significant in the later period. If managerial learning reflects the

broader social choice approach, we would expect attention to transaction

costs, market failure and citizen voice all to be reflected in the managerial

learning process.

Results Modelling the Framework in a Probit ModelWe tested this conceptual framework in a probit regression model3 where

the dependent variables were the level of new contracting out and reverse

contracting over the level of services provided in both time periods by each

municipality. In addition, we calculated marginal effects for independent




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variables that were found to be significant.4 The model coefficients indicate

only the direction of the independent effect. The marginal effect allows us to

compare the strength of different independent effects.

Several variables were found to affect the level of contracting direction(contracting out or reverse contracting) significantly, as shown in Table 2.

Place structure (metropolitan status), mixed delivery, and asset specificity

were significant in three of the four different models, giving support to the

importance of market failure and transaction cost theories. Support for new

public management is seen in the first period as governments experiment

with contracting even when asset specificity is high. Support for new public

service appears in the second period models where the citizen voice variable

becomes significant for the first time.

Transaction costs are of primary importance in explaining levels of newcontracting out. An increase in prior asset specificity scale by one unit

increases new contracting out by 17 per cent suggesting that managers were

following new public management ideology and experimenting with

contracting out asset-specific services between 1992 and 1997. As a result,

asset specificity of publicly provided services dropped with new contracting

out in 1997. This effect disappears in the 19972002 period as managers

learned that contracting out highly asset-specific services is problematic.

Managerial learning also is shown in the reverse contracting model, where

current asset specificity is higher among places with higher levels ofcontracting back in. Thus, the difficulty of contracting out asset-specific

services reflects a managerial learning process over the two time periods.

A similar process of managerial learning is found with measurability. New

contracting out in the first period was higher when measurement difficulty

was higher; this variable had the largest marginal effect. By the second

period managers had learned not to contract out difficult-to-measure

services and the relationship became negative. Measurement difficulty had

no effect in the models of reverse contracting.

Fiscal stress led to more contracting out in the second period but was not

significant on reverse contracting. Per capita expenditures were only

significant in the second period and show that both places with higher

new contracting and higher reverse contracting had lower expenditures. This

implies that efficiency gains can be achieved by market management

contracting out and reverse contracting not by contracting out alone.

Place matters and we see that core metro areas have lower levels of new

contracting out in the second period and higher levels of reverse contracting

than their suburban counterparts in both periods. The need to integrate

planning with markets is especially important for complex, heterogeneous

core cities. Rural municipalities also show lower levels of new contractingout in the later period and higher levels of reverse contracting in the first

period but lower levels in the later period. This may reflect less capability

to manage markets due to limited competition and less professional

management.




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Table2.ModelResultsExplainingShiftsinContractingandItsReverse

NewContractingOut

ReverseContracting

19921997

19972002

19921997

1997

2002

Variable

Coeff.

Marg.

Effect

Coeff.

Marg.

Effect

Coeff.

Marg.

Effect

Coeff.

Marg.

Effect

PriorForProfit

Delivery

73.475

714.6%

71.229

1.709

70.135

PriorAssetSpec

ificationScore

0.380

17.0%

70.025

70.524

71.0%

70.059

72.2%

CurrentAssetSpecificationScore

70.513

710.1%

70.078

72.6%

0.544

27.5%

70.025

PriorMeasurem

entDifficultyScore

1.359

32.0%

0.424

70.929

70.093

CurrentMeasurementDifficultyScore

0.050

70.211

74.3%

70.023

0.037

FiscalStress

70.025

0.086

2.6%

0.030

70.049

PriorPerCapita

LocalExpenditure

0.006

70.106

73.3%

70.012

70.049

71.5%

CoreMetro

70.011

70.078

72.2%

0.088

1.0%

0.158

4.7%

RuralIndependent

0.007

70.067

71.9%

0.103

1.2%

70.091

72.5%

VoiceIndex

70.046

70.335

73.3%

0.004

0.211

2.2%

CouncilManage

r

70.018

70.003

0.016

70.028

PriorMixedDelivery

70.996

77.3%

70.367

73.3%

1.779

8.4%

70.055

70.5%

CurrentMixedDelivery

0.302

3.3%

0.125

70.243

70.8%

0.332

3.5%

Constant

70.662

70.793

71.617

70.839

GoodnessofFit

w2

3671

P5

0.001

w2

2170

P5

0.001

w2

1914

P5

0.001

w2

3012

P5

0.001

Shadedcellsrepresentsignificantcoefficientatp

5

0.05

Source:InternationalCity/CountyManagement

Association,ProfileofAlternativeServiceDeliveryApproaches,SurveyData1992,1997,2002Washington

DC.Analysisby

Author.




16/20

The voice index was insignificant in the first period for either model (out

or reverse), but it became important in the second period leading to lower

levels of new contracting out and higher levels of reverse contracting. This

suggests that city managers recognise new public service and communicativeplanning concerns and seek to balance citizen voice with market manage-

ment issues as implied by social choice theory. The council manager variable

was not significant in any model but we believe that the managerial learning

process has been captured in the transaction costs, place and voice variables.

A high level of prior mixed service delivery diminishes the enthusiasm to

contract out and encourages reverse contracting. In contrast, the current

rate of mixed delivery encourages contracting out, but its effect on reverse

contracting is inconsistent. In the first period it has a small negative effect,

and later it positively affects the level of reverse contracting. Mixed deliveryfacilitates the decision to outsource services, but it also makes reverse

contracting possible as government retains a position in the service delivery

process. Building on the social choice approach, we consider mixed delivery

as more than the intuitive benchmarking described by Miranda and Lerner

(1995), and see it as a tool to enhance citizen voice and government

involvement in service delivery (Warner & Hefetz, 2007).

Current mixed service delivery complements new contracting out in the

first period, but it complements reverse contracting during the later period.

Reforms need a moderator and mixed delivery seems to play that role. Theidea of moderating between new contracting out and reverse contracting

means that managers integrate costs from both make and buy options in

order to get the best value. When it is difficult to specify the contract, it is

better to maintain both alternatives through mixed delivery. These results

indicate a learning process motivated first by an ideological pro-privatisation

push (new public management), but moderated later by a pragmatic turn

which gives greater attention to market management (transaction costs) and

citizen voice (new public service, communicative planning) in a combined

framework (social choice).

Conclusion

In this paper we have described a shift in theory from markets over planning

as argued by new public management, to a more integrated and balanced

view that combines markets and planning in an attempt to answer both

efficiency concerns and citizen needs (social choice). We use this

comprehensive social choice framework to explain why US municipalities

have shifted from a preference for contracting to a preference for public

delivery mixed with contracting out over the last decade.In the 199297 period, city managers were innovative and explored new

public management reforms by testing the potential for more market based

forms of service delivery. But something different explains the shift from

market back to government delivery in the later, 19972002, period.




17/20

Managers have expanded their concerns beyond transaction costs and

efficiency to give attention to citizen voice in the service delivery process.

This broader set of concerns reflects the social choice approach that includes

both market management and planning to create a nearly optimal solution.We learn that reforms, like other products, have a life cycle (Bel & Costas,

2006). First there is the innovation (contracting out, new public manage-

ment), then there is a period of wider use, and in the end the reform is

replaced by another reform (reverse contracting, new public service).

Innovative government, we claim, is the one that manages to fit the best mix

of delivery options to each service and meet higher standards within its

budget constraint. In order to find that mix, governments need to exercise

alternative modes over time and develop monitoring and communicative

tools that improve their control over service providers, on the one hand, andadvance their responsiveness to citizens, on the other.

Although privatisation has been studied from many different angles, we

still need to understand the interactions between markets and planning. In

modern cities, many public services fail to meet the classic theory of market

failure, but public delivery may still be required due to complexity and social

demands. Governments are exploring alternative ways to deliver goods

through a quasi-market mechanism. By viewing public service delivery as a

planning tool, we can learn how governments use the service delivery

process to improve efficiency and public engagement.We have shown theoretically how new public administration approaches

can intersect with modern planning theories. Empirically we see evidence of

a more comprehensive social choice approach emerging where city managers

balance market delivery with attention to citizen voice. While public adminis-

tration is recognising that political capacity requires a government role to

engage and resolve urban conflict, the social choice approach recognises the

power in combining market approaches with planning. It is the intersection

between markets and planning that creates a more robust management

process to meet social objectives. The combination of new contracting and

reverse contracting reflects an effort by pragmatic managers to get the

balance right.

Acknowledgements

Funding for this research was provided in part by the National Research

Initiative of the Cooperative State Research, Education and Extension

Service, U.S. Dept. of Agriculture, Grant No. NYC-121524.

Notes

1 The construction of these variables is as follows: for asset specificity, the score is the average

of asset specificity across all services provided times the percentage of services provided

entirely by public employees. The measurability score is the average measurability score

across all services provided times the percentage contracted out to private firms.




18/20

2 The voice index is the average number of yes responses to the following set of factor

questions: active citizen group favouring privatisation; opposition from citizens; evaluation

of feasibility by service recipients/consumers; evaluation of feasibility by citizens advisory

committees; established a citizens advisory committee on private alternatives; surveyed

citizens during implementation; kept the service complaint mechanism in-house; monitored

citizen satisfaction after implementation; conducted citizen surveys after implementation,

monitoring citizen complaints.

One of the reviewers was concerned that the voice measure would fail to capture the role of

voice among respondents who did not contract out any services. We checked the data and

found 99 per cent of the sample restructured service delivery. Only 1 per cent of the sample

did not externalise any services (5 places in 1992, 7 in 1997 and 5 in 2002).

3 In the probit model, percentages are transformed into the inverse of the cumulative normal

distribution so that probabilities that range from zero to one are normally distributed all

along the scale.

4 The marginal effect is the percentage increase or decrease in contracting out, or in reverse

contracting, as a result of adding one extra unit of the independent variable. For continuous

variables, this unit is the difference between the mean minus one standard deviation and the

mean plus one standard deviation, while for a dichotomous variable it is the probability

between zero and one units of this variable.

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